Fee Shifting and Forum Selection in Bylaws


Where to fight your “partners”… And who will pay?

Clearly, litigation can present numerous difficult issues. Among the fundamental issues are the questions of where the lawsuit must be brought and whether you can compel your adversary to pay your attorneys’ fees and litigation expenses if you win. Consider the following…

Where can you commence a lawsuit?

For a court of a particular state to a hear case, it must have jurisdiction over the parties. Most typically, a state court will have the power to hear a case if the parties either “live” in the state or otherwise have a sufficient connection to the state. Under contract law, parties to a contract can agree where a lawsuit to enforce the contract must be brought. But, can a corporation’s bylaws require that shareholder suits asserting internal claims be brought in a particular state? If the corporation is a Delaware corporation, yes. Delaware recently amended its corporation law to allow bylaws to require internal corporate claims to be filed in Delaware.

Can you compel your adversary to pay your attorneys’ fees and litigation expenses?

The general rule in America is that each party pays his or her own attorneys’ fees and litigation expenses—win or lose. There are exceptions to the rule. One exception is that, under contract law, parties to a contract can agree that the “loser” will pay the prevailing party’s attorneys’ fees and litigation expenses. But, can a corporation’s bylaws require that shareholders pay the corporation’s attorneys’ fees and litigation expenses in connection with internal corporate claims? If the corporation is a Delaware corporation, no. Delaware recently amended its corporation law to preclude the imposition to pay the corporation’s attorneys’ fees and litigation expenses in connection with internal corporate claims.

Can you bootstrap?

In a recent case, a Delaware corporation adopted new bylaws that required all internal corporate claims to be filed in Delaware and further provided that an unsuccessful shareholder is required to pay the corporation’s attorneys’ fees and litigation expenses if the claim was filed outside the State of Delaware. The plaintiffs challenged the bylaws’ “fee shifting” provisions. The defendant advanced various arguments as to why Delaware’s prohibition against “fee shifting” did not apply to the bylaws as drafted. The court rejected each of the arguments, foreclosing the corporation’s attempt to “bootstrap” a fee-shifting provision into its bylaws.

Would you like more information?

The case in question was, Solak v. Sarowitz (Del. Ch. Dec. 27, 2016). Please feel free to contact me for more information about the case or how it may impact your company.

DISCLAIMER: This BLOG post is provided solely for the general interest of the reader. It is not legal advice or opinion. Legal advice and opinion are provided by the firm only upon engagement with respect to specific factual situations.